New York Real Estate for Brokers, 5th e
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Transcript of New York Real Estate for Brokers, 5th e
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 1
New York Real Estate for Brokers, 5th e
By Marcia Darvin SpadaCengage Learning
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 2
Chapter 3
Real Estate Finance II
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 3
Chapter 3 Key TermsAdjustable rate
mortgage (ARM)Amortized mortgageBridge loanBuydownConstruction loanConventional loansConvertible
mortgageDepartment of
Veteran Affairs (VA)
DepressionDisintermediationFederal Housing
Administration (FHA)Gap financingGround leaseHome equity loan Inflation
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 4
Chapter 3 Key Terms (continued)
Installment land contract (contract for deed)
Mortgagee/mortgagor
Primary mortgage market
Recession RedliningRelease clause
Sale leaseback Secondary mortgage
marketStagflationState of New York
Mortgage Agency (SONYMA)
Subordinate leaseUnderwritingUsury
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 5
Mortgagor and MortgageeThe borrower
gives amortgage to thelender
Mortgagor
The lender receives a mortgage from the borrower
Mortgagee
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 6
Mortgage Clauses
Mortgage
Note or
Bond
PrepaymentPenaltyclause
Defeasance
Clause
Acceleration
Clause
Alienation
Clause
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 7
Monthly Mortgage PaymentP = Principal
I = Interest
T = Taxes
I = Insurance
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 8
Lender’s Criteria for Granting a Loan
$ Investment
quality of the
property
$ Loan-to-value
ratio
$ Borrower’s
ability to repay
loan
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 9
Loan-to-Value RatioRatio of loan
amount to property value
Loan ÷value = ratio
Example:
Loan = $144,000Value = $160,000
144,000 = 90%160,000
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 10
Qualifying RatiosMonthly HousingExpense
Total Obligations
Fixed rate conventional loan
28% 36%
Adjustable rate Conventional loan
28 % 36%
FHA loans 31% 41%
VA loans None 41%
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 11
Mortgage Loan Origination
Uniform Residential Loan
Application Form
Loan processing-
Application review
Underwriting-Documentation
review
Loan
Approval
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 12
Conventional and Government Loans
Conventional loan
No participation by a government agency
Government loan
Guaranteed, insured or funded by a government agency
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 13
Types of MortgagesFHA-insured loans
VA Guaranteed loans
Rural Housing
Service
State of New York
Mortgage
Association
(SONYMA)
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 14
Mortgages
Straight-term
Straight-term
Adjust-ablerate
Adjust-ablerate
BlanketBlanket
BalloonBalloon
AmortizedAmortized
MortgageMortgage
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 15
Other Mortgages
Special
Mortgages
Graduated
paymentPackage
Shared
appreciation
Reverse
annuity
Pledged
account
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 16
Special Types of Mortgages
Home equity loan
Gap financing
Wraparound
Subordinate or Junior Mortgages
Purchase Money Mortgage
Convertible Mortgage
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 17
Construction MortgageShort term loan
Disbursed in
stages
Interest not
charged until the
money has been
disbursed
When project is
complete,
converted to
permanent long-
term loan called
take-out or end
loan
© 2013 All rights reserved.
Sale Leaseback
Chapter 3 Real Estate Finance II 18
© 2013 All rights reserved.
How to Secure FHA FinancingFHA does not make
mortgage loansFHA-insured loans
protects lenders against financial loss
Buyer pays for this insurance protection by paying an upfront mortgage insurance premium
FHA does not set maximum sales price, only a maximum loan amount
FHA insured mortgages require mortgage insurance
Chapter 3 Real Estate Finance II 19
© 2013 All rights reserved.
FHA MortgageAdvantages
Credit criteria for a borrower are not as strict
Borrower’s allowable costs can be partially wrapped into loan
100% of down payment and closing costs can be gifted
Loans are assumable
Disadvantages With a 30-year FHA loan,
and a down payment of more than 5% of the loan amount, the upfront mortgage insurance premium (MIP) is 2.25 percent of the loan amount in addition to the 1.10 percent annual renewal premium that a borrower pays for the life of the loan
FHA limits the amount that can be borrowed
Chapter 3 Real Estate Finance II 20
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 21
The Primary and Secondary Mortgage Market
Sold to secondary
mortgage
market
Primary
lender
Mortgage Assignable
(conformingLoans)
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 22
Secondary Mortgage Market Organizations
Name Ownership Purchases
Fannie Mae (FNMA)
Privately owned
FHA, VA, RHS, conventional
Ginnie Mae(GNMA)
HUD VA, FHA, RHS
Freddie Mac(FHLMC)
Savings. savings and loan banks
Members of Fed. Home Loan Bank, other banks
© 2013 All rights reserved.Chapter 3 Real Estate Finance II 23
Truth-in-Lending Act
o Disclosure
o Cooling off period
o Advertising (Regulation Z)
o Penalties
© 2013 All rights reserved.
Lending Discrimination Laws
ACTSACTS
Truth in Lending Truth in Lending ActAct
Community Community ReinvestmentReinvestment
ActAct
Real Estate SettlementReal Estate Settlement& Procedures Act& Procedures Act
Home MortgageHome MortgageDisclosure ActDisclosure Act
Chapter 3 Real Estate Finance II 24
© 2013 All rights reserved.
The Economy and How it Affects the Real Estate Market
Chapter 3 Real Estate Finance II 25
Affordability of propertyfor buyers
Valuation of
Seller’sproperty
Stock Market
Interest rates/indices
TheEconomy
Employment
© 2013 All rights reserved.
Predatory Lending Practices-What is it?High-cost
(subprime loans) include conventional first mortgages that have an interest rate of more than 8 percent and junior mortgages that have an interest rate of more than 9 percent
High-cost loans also include conventional loans for more than $50,000 when the points and fees exceed 5 percent of the loan
Chapter 3 Real Estate Finance II 26
© 2013 All rights reserved.
Predatory Lending Lender may target
certain ethnic group
Takes advantage of consumer
Lender makes unaffordable loans based on assets of borrower, not ability to repay
Induces refinancing (flipping)
Fraud regarding true nature of loan obligation
Chapter 3 Real Estate Finance II 27
© 2013 All rights reserved.
Flipping Real estate
investors or speculators believe that they can turn quick profits by buying the property at a certain price and then immediately selling the property at a higher price
Flipping may be a problem because it can drive up prices
The investor attempts to buy low and sell high
Chapter 3 Real Estate Finance II 28
© 2013 All rights reserved.
Subprime Loans
Borrowers considered subprime if they have a less-than-perfect credit report
Subprime lenders Companies that provide loans to home-buyers who do not have good credit histories or who are risky candidates for loans because of their incomes
Chapter 3 Real Estate Finance II 29
© 2013 All rights reserved.
New York Anti-Predatory Lending LawPlaces many restrictions on high-cost (subprime) loans that are first or junior (second) mortgages
Loans covered under New York LawMaximum indebtedness of $300,000For family or personal reasonsApplies to one- to four-unit property that is the borrower’s personal residence
Chapter 3 Real Estate Finance II 30